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Elasticity Practice
Here you will ﬁnd a few exercises to test your understanding of the concept of price elasticity. All that
you really need to know is the deﬁnitions of price elasticity and of revenue. The rest you can handle by just
using your head and performing simple calculations. In words, we can state the deﬁnition of elasticity of
demand as ”percent change in
quantity
divided by percent change in
price
as one moves along the demand
curve.” More speciﬁcally, suppose that the demand curve is given by an equation
p
=
P
d
(
q
). Suppose that
we are given two points on a demand curve. One point is a quantity
q
and a price
p
=
P
d
(
q
) on this demand
curve. The other point is a diﬀerent quantity
q
0
and price
p
0
on the demand curve. Let
E
d
be the elasticity
of demand for the movement between these two points.
E
d
=
±
q
0

q
q
¶
÷
±
p
0

p
p
¶
.
(1)
We can use this deﬁnition to solve Problem 1. From equation 1, we see that if we know any two of
the numbers
E
d
,
‡
q
0

q
q
·
and
‡
p
0

p
p
·
, we can calculate the third. This fact is suﬃcient to allow you to ﬁgure
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 Fall '07
 Bergstrom
 Price Elasticity

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